jueves, 15 de octubre de 2015

What is an ADR: Trading in other markets

Simply put, an ADR ("American Depositary Receipt") is a non-US stock which is traded in US markets. To be more specific, it is a physical certificate representing deposited shares of a non-US company in an American bank. They have all rights and obligations, including dividend and voting rights, and may also be converted into the origin stock, which are known as ADS ("American Depositary Share") at any time at the request of the holder.

Why do some companies are interested in trading in the United States?

We could say that there are two main causes: one practical and one commercial.

The first is a way for their shares to gain volume, allowing investors around the world to trade in dollars through its US broker.

The second reason is for image. In the same way that all firms want to be established in the most important commercial streets of the world's major cities, with companies happen exactly the same when trading on the main stock market worldwide.

Why an investor would be interested in investing through an ADR?

To answer this question we must consider several factors:

- The ADR costs: Obviously, the more players there are on the road, there will be more associated costs. In this case the American depositary bank charges a custody fee. In addition, some of them charge us an additional fee every time we receive a dividend.

- Broker commision: Probably the great advantage of an ADR. Overall, trading through the American market is cheaper than 99% of world markets, at least for an investor who is not from the country itself. That is, for many traders is probably cheaper to buy shares in the United States than directly in Japan, for instance.

- Taxation: In theory there is no effect, since the same tax that would apply in the country of origin is applied in this case. For example, if we buy an ADR of a German company, we would be retained 26% of the duty payable to Germany, since the dividend would already be deducted at source.

- Currency Risk: Someone might think it's safer to buy dollars in a weak currency, but in reality, we are exposed to the currency of origin, so there is no advantage in this regard.

- More time to trade: An ADR lets you trade on American time, while other markets remain closed.

Conclusion

An ADR is a tool for companies around the world to list on the main square of capitalism, the United States. For us, as investor, can be an interesting option to invest in certain markets at much lower costs.